Business Organizations
BUS1010 – Almira A. Mohammed
TABLE OF CONTENTS
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Intro to Business Organizations ………………………………………..……………………………………………… 3
Sole Proprietorship ……………………………………………………………………………………………………………. 3
Partnerships ………………………………………………………………………………………………………………………. 4
Limited Liability Companies …………………………………………………………………………………………….. 5
Introduction to Business Organizations
There are a variety of different forms of business organizations that one could go about making if desired. The type of business organization that an individual chooses to start could mean a number of different things, and it could potentially impact the whole future of his/her business. Hence, it is so important that these types are fully understood before a business decision is made.
These are the three main types of business organizations:
Sole Proprietorship or Sole Trader
Partnerships
Limited Liability Companies
Other forms of business organizations include:
Multinationals
Subchapter S
Cooperatives
… etc.
Each business form has its own advantages and disadvantages, which will be discussed further in detail soon.
Now, within these forms/types of business organizations, there are so many kinds of businesses that individuals could venture into. For example, a flower shop or a fresh juice shop is a kind of business within sole proprietorship. Likewise, if two friends decide they want to open a pet shop or vintage clothing store together, it would be a kind of business that would fall under partnerships.
As stated above, it is important to understand the different types/forms of businesses, and to be sure of what it is that you want to do before just diving right in.
Sole Proprietorship / Sole Trader
Sole proprietorship is one of the most common forms of business organizations that people venture into. It’s no surprise either, since starting a sole proprietorship is very easy and simple to begin and requires very low start-up costs. In a sole proprietorship, the owner has full control of his/her business, and are almost always incharge of all decisions made, making it more appealing to potential business owners. A sole trader gets to keep all profits made for themselves, without having to share them or having to pay taxes, as they can treat all the money they earn as personal income.
However, just like everything else, a sole trader does have its fair share of disadvantages too. One of the main and biggest downfalls of a sole proprietorship is that it has unlimited liability. What this basically means is that the owner is held liable/responsible for making sure all the debts and money owed by the business is payed off – this could lead to a potential loss of assets. For instance, if a sole trader were to take a loan from a bank, but for whatever reason the business is unable to pay the bank back afterwards, the owner would have to sell even their personal assets if they must in order to repay the loan taken. This leads us straight to the next disadvantage which is that a sole trader has no separate legal entities. What this means? The business owner and the business itself are seen as one in the eyes of the law; there is no difference between the owner and his/her business – the owner is the business. Additionally, since there is only one single owner, a sole proprietorship becomes harder to manage and it can become very overwhelming, especially since there are no fixed work timings when you work for yourself. Lastly, a sole trader business lacks continuity. In other words, when the business owner dies, the business is legally shut down/dissolved.
Partnerships
Along with sole proprietorships, partnerships are also very commonly ventured into. There are two types of partnerships – general partnerships and limited partnerships. A partnership normally has multiple owners (two or more), and though it is also fairly easy to set up, it is slightly more complicated than sole proprietorships. In a general partnership, the owners run the business together, and are all held liable to any debts (unlimited liability). On the other hand, in a limited partnership, shareholders/business partners may be financially involved in the business, and they might share the business profits or even its losses, but the limited partners only have limited liability. What this means is that these limited partners may lose some of their business assets, ut their personal assets are fully off limits, hence they have no risk of being involved in the partnership.
One of advantages of partnerships is that they have the ability to make more profit and to have more capital than a sole proprietorship. Partnerships also have a higher chance for survival in the business industry, especially since there are more people to help generate new ideas and to balance the overall workload. With more hands on deck, it’s less overwhelming for the partnership owners. It is likely that each of the owners bring their own new skills and knowledge to the table, some more experienced than the others, thus increasing the capacity for growth of the partnership. Another advantage not seen in a sole trader business is that partners usually divide their losses, so everyone takes his or her equal share of the loss.
On the downside, partnerships have unlimited liability as well. As explained earlier, this can be a big negative for the business and its owners. Another huge disadvantage is that the partnership owners must split all profits made with their business partners, unlike sole proprietorships where the owner gets to keep all funds made for themselves without sharing. Partnerships also have the potential for arguments/disagreements between owners, especially since the more people that are involved, the higher the differences in opinions. This form of business organizations is harder to terminate/dissolve, because there is more than one person involved in running and operating the business. As with sole proprietorships, partnerships also lack continuity, and it is not so simple to transfer ownership.
Limited Liability Companies (LLC)
Limited liability companies are a sort of hybrid/mixture of a corporation and a partnership, whereby they have the characteristics of the two, except they pay taxes and only have limited liability instead. There are two types of limited liability companies – private limited companies (ending with ltd.) and public limited companies (ending with plc.)
A partnership can convert into a private limited company, which has to have one or more shareholders. Private limited companies can only sell shares to friends/family, but not to the general public. Hence, a private limited company can then go on to convert into a public limited company to be able to sell shares to people or organizations (the public) on a stock market, having at least two shareholders. Public limited companies are obliged to publicise annual reports by the government, much to their disadvantage.
As a whole, limited liability companies have more capital, and more amounts of finance/financial resources. Since these are much larger business organizations, it is easier for them to take loans. Banks are more likely to favor them and help them out compared to smaller businesses like sole proprietorships and partnerships since they know that limited liability companies are more financially stable and will be able to return the loan. If however the circumstances arise where an LLC does not raise enough funds to repay the loan, they only end up losing business assets – not personal assets – since they have limited liability (just like the name suggests). They have separate legal entities, the business and its owner are seen as separate in the eyes of the law. Unfortunately for them, limited liability companies are more expensive to start and operate, and they have to pay taxes as well.
REFERENCES
Scoreorg. (2018). Limited Liability Companies: Advantages & Disadvantages, Retrieved 3 October, 2018, from https://greaterknoxville.score.org/news/limited-liability-company-advantages-disadvantages
Legalzoomcom. (2015). Disadtvantages of an LLC, Retrieved 3 October, 2018, from https://www.legalzoom.com/knowledge/llc/topic/disadvantages-of-an-llc
Ebert, R. J. & Griffin, R. W. (2017) Business Essentials / Eleventh Edition. Pearson.
